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TMI Blog2013 (7) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... ated the profit in terms with Article 7(2) of Indo-US DTAA and Rule 10 of Income- tax Rules by estimating the income @ cost plus 15% mark up. The CIT (A) reduced the profit to 10% on considering the fact that the estimation of profit by the Assessing Officer is not based on any specific information and data. - The view of CIT(A) appears to be reasonable. So far as the assessee's contention that the head office has suffered loss and hence there cannot be any profit to the branch office, the same is not acceptable as profit of the branch office has to be computed as per the income earned by it. - Decided against the assessee. - ITA No.1651/Hyd/2011, ITA No.1672/Hyd/2011 - - - Dated:- 28-6-2013 - Shri Chandra Poojari And Shri Saktijit Dey,JJ. For the Appellant : Shri S. Rama Rao For the Respondent : Smt. T. H. Vijaya Lakshmi ORDER Per Saktijit Dey, J. M:- These are cross appeals filed by the assessee and the department directed against the order dated 11-7-2011 passed in ITA No.0094/AC(IT)-II/CIT(A)-V/2010-11 pertaining to the assessment year 2006-07. 2. First we will deal with ITA No.1651/Hyd/11 filed by the assessee. The assessee has raised the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer held that as per Article 5(1) of Indo-US DTAA the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. He further noted that the branch office at Hyderabad is engaged in software development, software product enhancements, customer care and medical transcription services of in house health care IT products. Hence there is a permanent establishment in India. The Assessing Officer referring to Article 7(2) of Indo-US DTAA and Rule 10 of Income-tax Rules came to a conclusion that the assessee's income has to be estimated at cost plus 15% mark up. Accordingly, he determined the profit at Rs.34,94,438/-. The assessee being aggrieved of the assessment order so passed preferred an appeal before the CIT (A). 6. Before the CIT (A), the assessee filed written submissions mostly reiterating the stand taken before the Assessing Officer. It was submitted by the assessee that as per para-3 of Artcle-7 of DTAA while determining the profit any income arising on account of specific services in the Head Office cannot be considered. It was submitted that during the previous year under consideration, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process certain portions of a movie. These activities with respect to their revenue are taxable in India. On the other hand for ease of operations and for cost effectiveness many companies will transfer some of their non commercial activities to their Indian branches. For example, the payroll package for head office may be operated in the Indian Branch along with other specific works relating to the functioning of the head office. These activities are distinct from the commercial activities of the companies as they relate to internal work of only that head office. Since, such activity is non commercial in nature, the DTAA rightly specifies that such special services will not be subjected to taxation in India. 6.4.2. In the case of the appellant there are no such specific services which are non-commercial in nature. The Indian Branch of Welinx Inc is clearly carrying out a portion of the normal commercial activities of USA company i.e., a part of medical transcription work and software development. There are no specific services for the head office, but are very obviously normal commercial activities of the company. They cannot fall within the purview of 'specific services' as me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even assuming that the assessee is a permanent establishment and is taxable on the income for the services rendered even then profit cannot be estimated as the Head Office during the year has suffered loss. In this context, the learned authorised representative for the assessee drew our attention to the accounts of the assessee at page-35 of the paper book. The learned authorised representative for the assessee further submitted that the estimation of profit at 15% by the Assessing Officer and at 10% by the CIT (A) is without any basis, as no comparable case has been brought on record on the basis of which profit was so estimated. It was submitted that though Rule 10(3) provides for estimation of profit by the Assessing Officer but at the same time it is subject to Article-7(2) of Indo-US DTAA. It was submitted that as the Head Office has suffered a loss during the year, there cannot be any profit for the branch. The learned authorised representative for the assessee relied upon a decision of the Income-tax Appellate Tribunal, Mumbai Bench in case of ADIT (International Taxation) vs. Credit Agricole Indosuez 21 ITR (Trib) 345 wherein it is held that the interest and commission rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal transcription services of your in house health care IT products." As would be evident from Item-2 of the aforesaid letter of RBI, the branch office of the assessee in India is to undertake software product enhancement, customer care and medical transcription services. It is the contention of the learned authorised representative for the assessee that as per Article-7(3) of Indo- US DTAA, any income arising out of specific services to the Head Office in USA is not to be considered. Article 7(3) of DTAA reads as under:- "In the determination of the profits of a permanent establishment, there still be allowed as deductions expenses which are incurred for the purposes of the business of he permanent establishment, including a reasonable allocation of executive and general administrative expenses research and development expenses, interest and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment)whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso rendering services of commercial nature which has been outsourced by the Head office. 12. After going through the order of the CIT (A), it is quite obvious that the assessee is only carrying out the normal commercial activities of the Head Office i.e., a part of medical transcription work and software development. The assessee has also not brought on record to establish the fact that the activities carried on by it is non commercial and in the nature of specific services as per the instruction of the Head Office. 13. At this stage, it will be appropriate to deal with the decisions relied upon by the assessee and find out whether they are applicable to the facts of the present appeal. In case of ADIT (International Taxation) vs. Credit Agricole Indosuez, the assessee received interest and commission from HO/braches and at the same time paid interest and commission to the HO/Branches. The Tribunal considering these facts in the light of the ratio laid down by the Special Bench in case of Sumitomo Mitsri Banking Corpn. Vs. DDIT (2012) 19 Taxmann.com.364 (Mum.) (SB) held that there being mutuality between he head office and Indian PE interest/commission received by the PE from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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